The exchange rate target zone literature has often suggested that mean reversion in an exchange rate within a zone can be taken as evidence that the system is credible. While the exchange rate system in Hong Kong is perceived as having a high degree of credibility, there is mixed empirical...

This paper extends the single-asset target-zone model pioneered by Krugman (1991) to include both bonds and equities. The new model provides a convenient framework for investigating a 'puzzle' recently noted in Hong Kong. While the economy has experienced persistently lower interest rates...